In a WSJ post I promised that I’d lay out a blueprint for building a company that’s as nimble as change itself—and I will, but first I’d like to share an anecdote about a simple experiment in workplace freedom.

In most organizations, the decision-making freedoms of frontline employees are highly circumscribed. Sales reps, call center staff, office managers, and assembly line workers are usually trussed up in tangle of top-down policies, “best practices,” and standard operating procedures. Yet it’s impossible to build a highly adaptable organization without first expanding the scope of employee freedom. To create an organization that’s adaptable and innovative, people need the freedom to challenge precedent, to “waste” time, to go outside of channels, to experiment, to take risks and to follow their passions.

Interestingly, humanity’s most adaptable social system—democracies and markets—are those that extend the greatest freedom to their constituents. In a democracy, you don’t need anyone’s permission to form a new political party, publish a politically charged article, or organize a “tea party.” And in open markets, individuals are free to buy and invest as they see fit. When compared to the typical corporate leviathan, these systems are remarkably under-managed.

In most languages, “control” is the first synonym for the word “manage.” Control is about spotting and correcting deviations from pre-defined standards; thus to control one must first constrain. Standards, policies and rules are important—no organization can exist or survive without them. The problem, though, is that managers (and public sector bureaucrats) are incentivized to enlarge, rather than reduce, the scope of their regulatory powers. More rules mean more things to control, which in turn means more job security and more power. The impetus to control works like a ratchet—as the years pass, the number of rules and regulations steadily increase. That’s why older organizations are usually more sclerotic than young ones—over time once flexible minds and muscles become slowly encased in a hard carapace of rules and regulations.

Imagine, then, the controls you might find in an organization that will soon celebrate its 150th birthday, a venerable institution like, say, the Bank of New Zealand. BNZ is the 148-year old subsidiary of National Australia Bank, but strangely enough it’s also a case study in the power empowerment. (Editor’s note: Professor Hamel is a faculty member on NAB’s senior leadership program.)

An impromptu experiment…

It started simply enough. In June, 2007, Chris Bayliss, BNZ’s General Manager for Retail Banking was visiting the bank’s City Center store in Christchurch. (Within BNZ’s retail-oriented culture, branch banks are known as “stores.”) It was just after 9 in the morning and the bank wasn’t yet open, but a long line of customers was already forming on the sidewalk. On most days, BNZ’s stores opened at 9 am, but today was Tuesday, and on Tuesdays and Wednesdays, staff training sessions kept the doors locked until 9.30—hence the queue. At BNZ, corporate policy dictated opening hours, and all of the bank’s 180 stores, from Invercargill in the south to Kaitaia in the north, adhered to the same schedule.

As the line of impatient customers continued to grow, Chris turned to Sue Eden, the store manager: “If you owned this store, would you open earlier and reschedule the training for another time?” “Of course,” answered Sue, “just look outside!” Chris frowned. Here was a store manager eager to serve her customers, yet bank policy was tripping her up. “OK then,” Chris challenged, “you choose when to open and close—but don’t expect any extra money from me staffing and training.” The store manager quickly agreed, and Chris walked out of the store scarcely aware that he had just launched a mini-revolution in employee freedom.

Within days, news of the policy break had spread across BNZ’s retail network. Soon Chris was fielding requests from managers throughout New Zealand, all of whom, it seemed, were eager for the same prerogatives that had just been granted the Christchurch store. With emails flooding in, Chris reached out to his colleague, Blair Vernon, General Manager of Marketing. Within the bank, opening hours were considered a “brand and customer experience issue,” and that was Blair’s bailiwick. As a teenager, Blair had flipped burgers at McDonald’s, a company let its franchisees decide when to open and close. Reckoning that what worked for McDonald’s would probably also work for BNZ, Blair agreed that the petitioners should be able to set their own hours.

In Takapuna, a tiny Auckland suburb, BNZ became the first bank to open on Sunday mornings. This allowed the store to serve the thousands of customers who flocked in to the local farmers’ market. In South Island ski towns, store managers opted to stay open until late in the evening, so skiers could attend to their banking needs after a full day on the slopes. Within city centers, many store managers chose to synchronize their schedules with nearby retailers, rather than to keep bankers’ hours. Within 6 months, nearly 95% of BNZ’s 180 stores had altered their opening hours in some way.

Not so fast…

While store managers were moving quickly to exploit their newfound freedom, there were many at head office who were fretting about the loss of control. Chris and Blair soon found themselves fighting a rearguard action with head office staff who regarded the policy shift as rushed if not reckless. Typically, a change of this magnitude would have go through a detailed risk assessment that gave every function the chance to weigh in. Chris and Blair struggled to defend their hurried decision. They hadn’t set out to bypass the usual decision-making process, but had simply been overwhelmed by the horde of frontline managers who were eager to follow the example of the Christchurch store.

Within the bank’s HR function, there was a concern that the New Zealand bankers union, Finsec, would raise a “ruckus” and object to any changes that extended the work day or compelled employees to come in on weekends. Others worried that store managers might choose to cut opening hours—a move that would jeopardize customer satisfaction and the brand. BNZ’s risk management experts had their own issues. There were detailed policies that governed how a store was supposed to be opened, and cash pick-ups from armored had to be scheduled at precise times. Given this, how could managers be allowed to open up “any old time they felt like it?” IT was another sticking point. The bank’s IT staff typically scheduled major maintenance work during times when the stores were closed. What would happen if a store opened at an odd hour and the IT system was down?

Then there was corporate marketing. Charged with protecting the brand, senior staffers worried that a hodge-podge of opening times might damage the bank’s carefully built reputation for consistency and reliability. And what about all those hand-lettered signs that were being used to announce new opening hours? They looked tacky.

While many of the objections were more political than practical, some were well-grounded and soon led to policy adjustments. A software template was developed that allowed store managers to print out a simple sign displaying local opening hours. Team members were reminded they still had to abide by the bank’s security policies and could do nothing that would jeopardize employee safety. Furthermore, store managers were expected to consult with team members before making any changes to staff schedules—new opening hours required the agreement of every store employee. This caveat also helped to neutralize objections from BNZ’s union. How could it demure when the new work schedules had been set by employees rather than imposed from above.

“What everyone learned,” says Blair, “is that when you treat people like adults, they act like adults.”

A day at the beach…

Though he never really feared an operational Armageddon, Chris acknowledges that the recent changes are irreversible. Says he, “The empowerment horse is really out of the stable now.” Store managers understand that the new policy was the product of an ad-lib experiment and a grass roots movement, rather than a group-level task force and carefully scripted roll-out. This fact, as well as the oft-expressed enthusiasm of Chris and Blair for a bottom-up approach to innovation, has encouraged store teams to take the initiative in testing other off-beat ideas.

One of the zaniest so far is a “trailer” bank. Explains Blair: “It’s a bank that’s kind of like an ice cream cart. It’s been shrunken so it can be pulled behind a vehicle. While the concept had been in development for several months, a local store caused a splash when they towed the trailer onto a beach on New Year’s Day. Clad in BNZ T-shirts, local staffers blew up balloons. Soon children were circling with their parents in tow. As a crowd gathered, store employees fired up a barbecue and were soon passing out sausages and chatting with potential customers about BNZ’s latest products.

While People and Culture worried that some might think the bank was exploiting its employees by making them work on New Years Day, or breaching the Health and Safety regulations by cooking sausages, Chris and Blair were more sanguine. Their view of the bank-on-the-beach: A great example of what charged-up employees can do when they have the freedom to experiment. Says Chris, “If we’d told them to do this, it never would have happened. But it was their idea, and no one even bothered to ask permission.”

Why it works…

So how has BNZ been able give employees more discretion and still run a disciplined and profitable business?

The answer starts with incentives. A typical BNZ store has four to seven team members: the store manager, a few tellers and a couple of salespeople, aka “advisors.” Each store manager receives a salary plus a bonus for meeting the store’s financial goals—usually 10% of base pay. In addition, the manager receives 10% of any profits earned in excess of the plan. Advisors receive bonuses based on the products they sell, such as credit cards and life insurance policies. Store employees also participate in a team-based incentive scheme that is linked to sales performance and customer satisfaction metrics.

In defending the move to flexible hours, Chris often argued that “there’s nothing more frustrating for staff than being open when the town is dead, or closed when it’s packed.”

The second component of BNZ’s decentralized control system is data—lots of it. Says Blair, “If you empower people but don’t give them information, they just fumble in the dark.” To address this, an initiative was launched in 2004 that gave every store employee a clear window into the financial performance of the bank. Daily P&L statements provide detailed information on costs, revenues, and profits for each store—all of it broken down by product and service.

Nothing remarkable about this, except that in most banks branch managers don’t get a real P&L. Instead they get a set of synthetic management accounts that provide only a rough indication of the store’s profitability—and they seldom get detailed information on the performance of other branches. These contrived performance measures allow head office executives to tweak incentive structures at will and exhort high performing branches to do even better.

By contrast, BNZ provides its store managers with a high definition picture of branch profitability—store managers even know the bank’s wholesale cost of funds, a number that heavily influences local P&Ls. Having been endowed with information, store managers are given lots of latitude in making business decisions—and are then held accountable for results. A store manager might, for example, choose to discount a profitable loan to win a new customer—but that loan would stay on the store’s books, contributing profits or losses, until it was paid off.

“It’s amazing,” says Blair. “If you get head office out of the way and give people accurate data about their performance, they quickly figure out that its good to be open when there’s money to be made!”

At BNZ, store employees have the incentives, the data, and the freedom that are typical of a small business owner. As a result, most regard themselves as more than mere clock-punchers; they’re folks who have a real stake in a real business—and they run it as if it was their own.

Blair summarizes the changes at BNZ with a telling anecdote. “I was walking by one of our stores on a Sunday morning with my kids, and my son said, “Dad, the doors on the bank are open.” And I thought, crap, someone forget to close the doors. But then I looked in, and saw that the entire store was open. No one is forced to roster on Sunday, but team members had come in from other branches in order to swap their hours. One mom was there working on Sunday because she wanted to take Wednesday off. And it hit me: no one at head office even knows when the stores are open.” Adds Chris, “The freedom to open when you want may not be the biggest thing we’ve done, but it’s the most symbolic in terms of telling our people, ‘we trust you, and we’re serious about empowering you.’”

OK, so none of this is rocket science, and by itself, this single policy breach is unlikely to transform the fortunes of BNZ. But the story is telling none the less. Ask yourself, how many policies in my company exist only to preserve the fiction that head office is really in control? How many enforce standardization at the expense of adaptability, and deliver few if any performance benefits?

Don’t get yourself into trouble, but here’s a question for you . . . where and how would you extend the scope of employee freedom in your company? What rule or regulation would you abolish, and why?

I’d like to acknowledge the assistance of Amy Blitz, my co-author on this post.

I'm wondering whether we really need a home office. Sure, they can perform some important functions. But I wonder whether they are a net productivity drain. Oh heck, let me just say it: I think they are a net productivity drain. Every rule, procedure, SOP, process, regulation... makes sense when viewed in isolation. But when viewed as a whole and with a view to the unintended consequences, it seems pretty clear to me that we need to be much more radical about eliminating bureaucracy.